Due to heightened expectation of a US interest rate hike in December, the US dollar was pushed to a seven-month high today. As a consequence, the rupiah depreciated 0.73 percent to IDR 13,722 per US dollar (Bloomberg Dollar Index). Moreover, the strong US dollar impacted negatively on commodity prices. Many commodity prices, including oil, copper and nickel plunged severely on today's trading day. For key commodity producers, which include Indonesia, falling commodity prices put pressure on assets.
Indonesia's benchmark Jakarta Composite Index fell 0.44 percent to 4,541.07 points. After being in the red for most of the first trading session on Monday (23/11), investors engaged in profit-taking in the second session as news spread about tumbling commodity prices.
Jakarta Composite Index (IHSG):
Pressure from falling commodity prices and looming higher US interest rates offset Indonesia's recent positive domestic sentiments (such as easing inflation, the lower current account deficit and the economic stimulus packages). Expectation of more stimulus from the European Central Bank (ECB) also failed to increase investor appetite for riskier assets, including Indonesian stocks and the rupiah, today.
Regarding the US interest rate hike, we expect to see large capital outflows in the days ahead of the next Federal Reserve meeting (15-16 December) as investors are becoming increasingly certain about a rate hike in the world's largest economy. Once the Federal Reserve has officially announced the increase, we expect to see capital inflows into Indonesia again soon.
A last note, analysts assume that fund managers will engage in window dressing as the year is coming to an end. Window dressing is a strategy to improve the appearance of the fund performance before presenting it to clients and shareholders. This should have a positive impact on the Jakarta Composite Index.
The Indonesian rupiah, similar to other emerging market currencies, depreciated against the US dollar as markets are expecting to see the first Fed Fund Rate hike (since 2006) in December.
However, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.31 percent to IDR 13,696 per US dollar on Monday (23/11). Tomorrow, this benchmark is expected to depreciate in line with developments today.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia